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Bricking it - the truth about Consumer Duty and wealth management

In the middle of the great financial crisis I remember listening to Bill Mott, one of the leading fund managers at the time, discussing the challenging task central banks had ahead of them. He called it the “biggest financial experiment in history” and related the challenge to pulling a brick with a piece of elastic. There is some effort required to create tension in the elastic, afterwhich caution is advised, pull too hard and the elastic might snap, pull too suddenly and the brick might fly up and hit you in the face, pull just the right amount and whilst it won’t be easy the brick will begin to move but always, always stay vigilant.

A great deal has happened to the wealth management industry in the intervening period, huge regulatory changes, good and bad markets, and a pandemic, but for the most part the industry's brick kept moving, but recently I think the elastic has snapped.

Building trust and explaining complex matters is typically easiest and most effective in a face to face environment, so when discussing a portfolio’s performance through the worst stock market period in living memory, face to face was the way. When discussing new ways of charging clients, servicing clients, requirements to assess risk profiles in a structured way, face to face was the way, and when discussing the ever changing pension landscape, face to face was the way. Until it wasn't.

The pandemic-driven ‘rush to zoom’ was made easy and proved effective thanks to the various video conferencing providers who moved quickly from corporate convenience to everyday necessity and with that the wealth management industry digitised overnight. 

The (forced) rush to digitise

Wealth Management firms had been discussing becoming digital for a number of years, but the ambitions of most wealth management firms only really stretched as far as a portal showing a portfolio value and maybe a messaging inbox. The limiting factor to the ambition was a belief that clients had to - and wanted to - see their advisers face to face for every review meeting and for every important discussion. That belief was proven wrong, clients' appetite to do more with tech was highlighted, giving a hard, sharp pull to the elastic tied to the industry's brick, and the brick moved a little but then the elastic snapped, leaving the brick stationary. No one has rushed back to try and repair the elastic, perhaps tech has gone far enough?

Let me bring some clarity to the parties involved before I stretch this analogy further. Represented by the industry's brick are all the clients and the services they consume, all the advice they have been given, the investments that are being managed, in short everything they pay for. The parties pulling the brick are the wealth managers who steadily evolve the solutions provided at a pace they feel is right, and the elastic being all the things that connect the interests of the client with the interests of the practitioners and their firms.

With the elastic snapped and without a catalyst for repair I think it's quite conceivable that the industry sees this as a good place to stop and draw breath, after all it's been pulling for some time.  But in any journey when momentum is lost it's hard to start again, and what is of greater concern is that given the pace of technological change if you aren’t moving forward you are actually going backwards and that is not good for any industry let alone one with the future potential that wealth management has.

First the stick

I don't expect everyone to agree with my next comment, but bear with me because there is no avoiding what’s coming next. Consumer Duty is fantastic, it is the perfect catalyst to get the brick moving again and not only that it will demand that the brick moves further, faster and more safely 

The regulator has arrived (in their high-viz like the AA) and are in the process of removing the old elastic, and wrapping some more durable elastic to the brick, and whilst they do that they are asking wealth managers to step a little further away from the brick, and then a little bit more. Come July, the brick will be wrapped in a more durable and powerful elastic band, and the band will be stretched to the perfect point of tension and handed back to the wealth managers.

Those unprepared for the strength of pull from the new elastic could find themselves being propelled towards a static brick. A similar fate awaits those who opt to do nothing or for those who plough on with the business models in place today, in these scenarios either fatigue will kick in and you will meet the brick with force or the hard pull of high costs will motivate the brick full of client discontent to fly in your direction. The only option left is to pull and gather some steady momentum and then to keep going.

And then the carrot

I still haven't explained why consumer duty is fantastic. I have been in the industry for over 20 years, I’ve worked as a planner, worked in investment firms and worked in firms who provide services to the front, middle and back offices of the wealth management industry. I see the many positive effects good wealth management can have on clients' lives but the industry has a lot to improve upon and perhaps not being at the coal face allows me to take a more objective view about the need to change than those working with clients day in day out.

Today less than 10% of UK adults have taken advice, only 20% of 50-64 yr olds have taken advice, and over 50% of pensions are taken without advice. That presents a huge opportunity for the industry to grow commercially and an even greater opportunity for the industry to become as essential to clients as banking is to the +90% of adults in the UK who use its services. But not if we keep on following the model of today. 

Many of the unengaged 90% see advice as too expensive, and the industry itself, including those investing into it, seem focused (or motivated) to hold the line with these costs. But this ignores an important operational fact, much of the costs charged by the industry is as a result of analogue administration whereas we all live in an increasingly digital world.

The more efficient the industry gets, the more unnecessary costs we can remove from the services it offers, leaving the client with only the necessary costs i.e. the actual cost of advice. 

But when digital tech is involved efficiency doesn't just come from within the business, giving clients more control through a suite of self-service capabilities, even some uptake will create efficiency for client facing roles and remove unnecessary administrative costs as well. 

Playing this through to the end, the ability to deliver all the services the industry provides today at a lower cost will make the industry more accessible and will give the clients a better net outcome from the same capabilities.

So a renewed and stated focus from the regulator on value for money, good outcomes, continual development of propositions, and a suggestion to re-examine current business models, should motivate change and make Consumer Duty the key to phenomenal long term success for the Wealth Management Industry. And that's why I think it's fantastic. 

We are currently writing a paper which will share some thoughts on how to evolve your business model. Not everything we consider will be a perfect fit, but hopefully some of our thoughts add value as you look to evolve your business from July onwards.




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